Re-thinking investment management

Here at Greybeard Towers, my wife has been more than happy to leave the investment decisions to me.

Left-leaning and with a degree in Latin and Ancient History, she’s preferred to delegate investing matters to someone who a) enjoys them, and b) has academic qualifications that are – as she sees it – at least more relevant to modern-day investing than a degree in Latin.

No longer. Mrs Greybeard has now finally been introduced to her long-standing SIPP, and has made a couple of trades1. She also now understands a little more about where all our collective investments are, in terms of which platforms and providers, and how much is invested where.

Still to come: why specific investments are where they are.

Further down the line, she obviously also needs to know what to do with those investments if I suddenly pass away, leaving Monevator readers sadly sobbing into their portfolios.

Trackers vs. Investment Trusts

Some of this, I’ll admit, was in my mind as I read the comments on last month’s article, in which I described how I was gradually transitioning my SIPP portfolio away from low-cost trackers and towards income-centric investment trusts.

Especially so in the case of those comments decrying income-centric investment trusts, and advocating various passive strategies – ETFs, trackers, and so on. And specifically, those posts that were advocating going all-out for a total return approach, where in retirement we’d gradually sell off our capital in order to generate an income.

That is fine as long as the investor in question is mentally competent enough to handle the administrative burden associated with periodically pushing the ‘sell’ button to generate funds with which to pay the bills.

But this can’t be taken for granted, as I’ve seen at first hand, close to home, within my own family.

Hence – to me at least – the attraction of a set of broadly-based, well-diversified investment trusts, which reliably deliver an income to your bank account, without the investor needing to do much more beyond simply spending the dosh.

Peace of mind

There’s a price to pay for this, to be sure. Even a low-cost investment trust has a management fee that is several times that of an ultra-competitive tracker.

And to those of you who argue that your passive-based strategies will almost certainly generate a higher overall total return, I’ve only one thing to say: I agree.

But the primary purpose of any investing return in retirement is to pay the bills. And it seems prudent to acknowledge that those bills need to be paid, whether you’re mentally competent enough to manage your investments or not.

Moreover, it also seems prudent to arrange to pay the bills for your surviving spouse or partner, should you die before them.

Especially if that surviving partner has shown no previous interest in investments.

So that’s the situation I’m trying to address. For being male, with a (slightly younger) female spouse, I don’t need an actuary to tell me that the odds are fairly reasonable that I will go first.

Facing forwards

What to take away from all this? Chiefly this: that pleasant fantasies about reaching your mid-80s, and then passing your spouse a sealed envelope containing advice or instructions about what to do after your death are exactly that – pleasant fantasies.

In reality, the Grim Reaper can arrive much sooner.

Much, much sooner.

And so I shall continue to gradually transition my SIPP portfolio into income-centric investments, believing that in doing so I’m addressing two risks.

One, generating an income if gagadom strikes.

Two, leaving my spouse with a straightforward means of redirecting that income to her own bank account should I suddenly keel over.

But to be frank, there’s another reason, too.

The last thing I want is for her to be faced with a situation so unmanageable that she calls in a smart-suited ‘adviser’, who might persuade her to switch the whole lot into some ghastly under-performing fee-laden ‘product’.

Meaning that having out-smarted the investment professionals in life, I can continue to do so in death, too.

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Knowing that I was going to write about her, Mrs Greybeard predicted I’d do so in a sexist and patronising manner. So there’s no need to write a comment telling me this – it’s a message I’ve been hearing for 35 years. [↩]

Excellent article, and quite sobering. Incidentally, I think the mental infirmity issue is still one of the few advantages of an annuity ; should you lose your wits, conmen can only extract so much from you in one go, whereas if you’re in drawdown they could potentially take all your assets.

Very timely article. I went to view a house to buy the other week where the owner (60 year old male, divorced and with the onset of dementia ) had been sold to by just about every cold caller and door to door salesman. This guy had a brand new kitchen (Tasteless, with EVERY gadget) huge UPVC conservatory (With a water feature fountain in the middle) a burglar alarm that would have made NASA look out of date and blinds and curtains that would make the queen jealous. This poor chap had been cleaned out of over £150,000 worth of life savings in under a year. Currently planning the same cross transfer of information to my better half, whilst simplifying the portfolio as much as possible (Without adversely reducing income). You don’t have to die to get totally screwed so it’s worth having a backup should your luck turn.

I have a spreadsheet of key data for the wife to review, but she just isn’t interested in the slightest. She is happy with the results, just has no idea how it happened. I guess the best I can hope for is that she doesn’t make any foolish decisions after I (almost certainly) go first. Having said that she is not a fool, just not particularly interested in investment and retirement planning…

A very timely article. In a similar situation and age to yourself. Also with a left leaning wife who has 0 interest in investing. At the moment in the process of selling trackers in our sipps
and reinvesting in income producing IT’s, simplifying the trackers into a Vanguard life stategedy 80% equity about 50% of the portfolio, plus a little on small caps. Trying to keep it simple very interested in where your research takes you. The next market correction is of some concern wondering if to keep dividends as cash to reinvest after the downturn?

This is a very important issue to me too.
When I left my IFA (who was excellent but charged 1%) the only thing that he said in our last meeting when we discussed why I should consider staying with them that gave me pause for thought was “what will your wife do if you die?”.
I know we all think our asset allocation and auto-rebalancing spreadsheet is “dead simple” and that trawling through ETF TER% is a fun way of spending a Friday … but it is clear not everyone else does.
I have written a note for her which basically says sell everything and buy Vanguard Lifestrategy 60/40 and every April sell what you need for the coming year. However that note is still 3 pages long – and pretty much ignores any tax optimisation of that approach or explaining how ISA and SIPP death benefits will work…
I can certainly see how an income-only approach is even simpler, just not sure I can get to the required yield without taking way too much risk.

I have a spreadsheet with all of our tracking data as well as all the relevent sites and info that she would need. My wife would likely need help to figure it all out, but the upside is that it’s all in one place.

@TG
Hence – to me at least – the attraction of a set of broadly-based, well-diversified investment trusts, which reliably deliver an income to your bank account, without the investor needing to do much more beyond simply spending the dosh.

+1
Those who advocate pure total return, conveniently overlook that capital gains do not come on a regular/reliable timetable. We do not want to be forced sell stocks at sentiment depressed prices to fund our retirement!

@todthedog
“At the moment in the process of selling trackers in our sipps
and reinvesting in income producing IT’s, simplifying the trackers into a Vanguard life stategedy 80% equity about 50% of the portfolio”

@hp
Hello again, informed comments as always!
“I have written a note for her which basically says sell everything and buy Vanguard Lifestrategy 60/40 and every April sell what you need for the coming year.”

If as suggested elsewhere the Vanguard Lifestrategy funds rebalance daily, what would happen in a prolonged drawdown such as 1929, 1930s? daily throwing good money after bad! Goes right against the grain with this investor, esp since it forsakes the market tendency to short to medium term momentum.. Why isn’t this issue with the Lifestrategy funds more widely discussed? Am I misssing something?

In general an investor may produce a living document the Investor Policy Statement in which are detailed the philosophy and plans of the investor. To add a section for the use of heirs is recommended, which section will probably be a stripped down version of current actions. Have done this and passed copies to heirs for them to fully understand own strategy, and how to handle affairs if investment does not interest or confuses them.

My wife is currently recovering very slowly from sudden and totally unexpected open heart surgery. She is the younger and we thought the healthier spouse. This has concentrated our minds on the issue of investment information for heirs, planning for succession, and reminded us that we are not immortal..

@magneto. Sadly I think the folks at Vanguard have lost the crystal ball that tells them when a market downturn has bottomed and so the optimum time to rebalance. Perhaps if you have found it you could let them know!
I will have to settle for a strategy that guarantees that I will be buying lowish and selling highish. I think most of the studies show that daily balancing is not much different to annual – it just costs more.
BTW The consensus I have seen on Vanguard rebalancing strategy is that they use daily cash in/out flows to move towards rebalancing but will not necessarily sell physical assets on a daily basis – that is a function of cost and threshold being crossed.

Excellent article. I think most of us stop at making sure the money goes where we want it to, but managing it from the Heavens is a step we don’t think about. I may inquire about getting my soul installed into my Net Worth spreadsheet 🙂

I’ve tried to keep Mrs Z in the loop from the beginning. She’s an accountant so I’m sure she could figure it out, but I suspect the lure of an adviser for ‘only’ 1% would be too much of a draw.

Keeping it simple is definitely key, just remember that famous acronym KISYP, Keep It Simple, You Plonker 😉

Mr Vanguardfan is not very interested, although he’s no slouch and I do talk him through our investments from time to time, so it wouldn’t be a complete mystery to him. I am sure that if your spouses are not fools, they will rise to the challenge when they have to, even if they won’t do it quite like you (likewise, there are loads of things MrVGF does for the household that I am currently pretty incompetent at, but if he weren’t around, I am sure I would find a way).

I think the risk of gaga-dom, and attendant vulnerabilities to those who would take advantage (not always strangers), is more significant. Often insight is one of the first capabilities to be lost…

I am starting to think that I really don’t want to wind up in my late 80s sitting on a pile of assets I can’t possibly spend. Perhaps setting a plan in advance to annuitise progressive tranches at 65, 70 and 75, regardless of how capable you feel, may be a wise idea. Wait until you feel you have become incompetent and it will be too late.

Thank you for this post which has reminded me to revise the document I have written about our finances for our children, when they eventually need to know.

We started off with Hargreaves Lansdown and our investments are still all with them. Another chunk of money will arrive shortly following the sale of my share of the business premises, and I have been considering placing it with a cheaper platform. But it had already occurred to me that juggling two brokers and arranging to pay their fees every month might become an increasing strain as my cerebral arteries clog up.

I know that HL ‘charges very fully for what it does’ (as the Lang Cat puts it) but they automatically send income to our joint account every month, and will sell off small chunks of the holdings to pay the fees should I forget to do so. If there isn’t quite as much left for our children to inherit when we finally pop our clogs (assuming that it hasn’t already been taken by social services to pay for care home fees) then I’m sure they won’t begrudge it.

I am looking forward to future articles from Greybeard about income generation. There is tons of stuff on the web about investing before retirement, but precious little about investing afterwards. Even Tim Hale’s ‘Smarter Investing’ fails to cover this area.

My wife refuses to wrestle with this stuff; she’s all for it in principle but against any particular manifestation of it. Meanwhile all I can do is try to simplify: again and again accounts get closed.

I’m considering 3ANICs for her, partly on the grounds that it’s harder to steal income than capital.

I read almost to the end thinking that “Gagadom” was perhaps a reference to some biblical city which came to an untimely end. The legendary, ill-fated city of Ga-ga-dom, or something. I even Googled it, but drew a blank.

The income smoothing properties of Investment Trusts is very welcome to many but the ‘income reserving’ is not tucking surplus dividends away in the bank until a rainy day but reinvesting part of the income flow in equity assets of the trust, such that a small amount can be sold in lean years to supplement the dividend flow.

They may be a simple way of generating income and whilst I hold some, legacy holding, the lack of transparency and the retention of income that could be used by an investor directly makes me less keen now. The nature of the holdings means than an investor is making an active choice within a fairly narrow space in the Equity world.

It is not difficult to set up a cash pot , say a couple of years income and then take the portfolio income. A quick check each year would reveal if markets were up, sell a bit, markets down don’t bother. The end result is a bank account that provides income.

The equity income investment trust would have worked well in the past for a spouse with no interest in investment matters but the future could change suddenly, perhaps new tax rules on dividends and then the disinterested spouse has a portfolio that does not provide income and holding assets that are out of favour. A US style broadly diversified portfolio with periodic asset sales to supplement dividends has much merit, if a little work and disinterest would vanish when needs must.

Interesting article, certainly something to think about for the future.

My preference would be to have everything in a Vanguard Lifestrategy fund or similar and sell units as needed for income.

Managing a portfolio of investment trusts will be more complicated and confusing for an elderly investor who has taken little interest in investing. Inevitably there will be corporate actions, splits, wind-ups, tender offers and the like to deal with.

Also, if you have suitably trustworthy children, then make sure they are knowledgeable about investing and have power of attorney.

@hp
“Sadly I think the folks at Vanguard have lost the crystal ball that tells them when a market downturn has bottomed and so the optimum time to rebalance. Perhaps if you have found it you could let them know!”

A touch of irony here hp methinks?
Think this quote from Wm Bernstein is apposite :-
‘Calendar rebalancing is still an effective, and quite simple, way to rebalance. If you use this method, do not rebalance more than once a year. Markets tend to exhibit momentum at periods of one year or less, and mean reversion takes place over longer periods. Rebalancing once every two to three years is plenty.’
For our heirs we have suggested every four years. Don’t know precisely why, just feels about right in line with historic market cycles. Won’t be optimum, but hopefully fail-safe, preventing assets being totally wiped out in a prolonged/serious downturn.
Suspect that Vanguard use daily balancing as a form of dubious constant risk (truly passive), so that no blame can be attributed to them for mistiming should they employ longer periods. ‘Not my fault gov, you knew you were buying daily rebalancing, we never said we knew the optimum rebalancing period’, sort of insurance for Vanguard, when things go pear shaped.
What I would like to see discussed here in depth on Monevator (any chance TI?) is why daily rebalancing is such a good thing, and how the maths would stack up in a prolonged/serious downturn.
All Best

@magento — I’ve replied to you on this before but I can’t recall if you replied or saw it. I’m not an expert on rebalancing at an institutional level, and I’m very unlikely to write an article on it. But I’d be very surprised if Vangard is doing anything for the non-customer centric reasons you imply.

Firstly, they’re likely doing it because if they’re selling a 60/40 product (say) then it should be a 60/40 product. No good the market going up 10% and someone thinking they are buying a 60/40 Lifestrategy fund actually buying something like a 65/35 one, with the extra risk it entails. That seems obvious to me, so perhaps I’m missing some nuance of your confusion.

Secondly, there is commentary about daily rebalancing delivering a rebalancing benefit. The big issue is cost. As I said last time I replied, you might try to get hold of “Unconventional Success” by David Swensen, and read the section on “real-time rebalancing”.

After more commentary he continues: “As a matter of course, every trading day, Yale [endowment fund] estimates the value of each of the components of the endowment. When marketable securities asset classes deviate from target allocation levels, the university’s investment office takes step to restore allocations to target levels”.

He adds that this is a “nice bonus” of frequent rebalancing, but stresses the fundamental motivation is to maintain targets and control risk.

For private investors, I think there’s no way of knowing what the best frequency would be with our own asset allocations, but one year is nice and easy to follow, or alternatively rebalancing when allocations move outside of pre-set bands is a bit closer to Swensen’s strategy, albeit you’d want to run wide bands for cost/time reasons.

@magneto
As I say I believe Vanguard do not actually completely rebalance daily (I base this mostly on US discussion about Lifestrategy and Target funds, so can’t be sure). In any one day they will have positive or negative cashflow due to subscription and redemption of units. They have to decide what to do! They seem to direct the new cash towards rebalancing i.e. to out of favour asset classes., rather than say just buy the whole portfolio in the right asset ratio. I suspect this is all about cost and turnover minimisation rather than any dubious desire to cover their backs.

I am not entirely sure I understand. Whether it’s an investment trust or an ETF or an index fund, the income (dividend or interest) would be deposited to your broker account, correct? How does it matter which instrument it is when the money is coming to the same place?

@PB — The better UK equity income investment trusts have a solid long-term record of paying an increasing dividend over time. In contrast, ETFs pay the income from the underlying assets, which is more volatile, so you could see your retirement income up 5% one year and then down 10% the next. There’s a lot more to it than that, with pros and cons for both methods — you might follow the links in the article above to learn more. 🙂

p.s. I’ve just realised you may be confused also by Greybeard’s reference to comments on the last article. Again, if you go back via the links you’ll see advocates of a ‘total return’ approach which says, effectively, that what matters is how much your portfolio goes up every year, as that is what increases your wealth — and you then ‘create’ an income by selling down capital (selling shares) to augment any income paid out by your ETFs.

In contrast, the income approach is to try to rely on the income your assets generate and not touch your more volatile capital. This has several benefits — the relevant one for this article is Greybeard’s wife wouldn’t have to make decisions about how to sell down her index fund/ETF portfolio every year; he’d rather she just had an income to spend generated by ITs.

The big disadvantage of the income approach is you’ll need a much larger portfolio in the first place if you’re not planning to spend your capital in retirement.

Also, depending on your situation re: heirs etc, you will be leaving a big chunk of capital on death that you might have spent enjoying a higher standard of living when alive.

Swings and roundabouts, if you have the choice. Many don’t, and will have to drawdown capital to some extent.

@PB The other point to make is that an index tracker or index-tracking ETF will only yield the market average. An income-centric investment trust (or income fund, if you’re happy with the additional costs) will deliver a higher yield than the market average, so that there is more money reaching your bank account. An income-centric investment trust can also build that income up from a multi-asset portfolio (bonds, property etc) which a straightforward tracker or equity ETF can’t do.

@TI & HP
From one Monevator link picked up :-
1. “Beware! The more often you rebalance, the more likely you are to curtail the superior returns of the winners before they turn into losers – essentially because you cut the winning run short.

2. The advantage of frequent rebalancing is that you’re less likely to be over-exposed to an asset on the rampage, and so avoid excess pain when the sell-off begins.”

There is a corollary to quote 1, for market downturns.

Note the Wm Bernstein link is relatively old (1996), his thinking seems to have shifted by 2014.

What bothers me about this daily rebalancing, is not so much choosing an alternative optimal rebalancing period (which we avoid by a progressive rebalancing method on which have expanded earlier) but the continual sucking of safe assets into a black hole by the daily rebalancing during a prolonged downturn.

While the issue does not affect us personally as noted above, troubled by the frequent recommending here and elsewhere (as a safe harbour) of funds that carry out such daily rebalances, whether from old or new fund flows. A re-read of The Great Depression, A Diary by Benjamin Roth, if needs, might remove the complacency of the reader, blithely assuming all will be well with such methods.

May be completely wrong on this issue; and should crunch the numbers first to confirm the full potential horror or otherwise of such rebalancing, before airing views. Will no doubt pick up on this theme in future where relevant.

Look forward to the follow up article, bought my second investment trust this week and have shifted from 100% tracker ETFs to an 80/20 (tracker/IT) split.

My rules are any trust has to be long established with a good history, not solely famous for having a particular star fund manager (who could depart), should have a reasonable management fee (not much more than 0.5%), and yield around about 4%.
Ideal for widows and orphans, well kind of.
Thats led me to CTY and MYI so far. Although I don’t see the point of buying too many or you might just end up with a closet tracker. So will probably just top up these two for a while yet.

You never know when it’s going to happen so being prepared is crucially important. At this age is like walking on a wire you never know when it’s going to break. The risks will never be fully covered but it’s important to make all possible arrangements for the beloved ones.

I am an IFA and have over 100 clients in drawdown via SIPP’s. These are generally invested in investment trust shares and ETFs. As you may appreciate, pensions are subject to trust (generally a “master trust” to which new SIPP members “attach” by completing a supplemental deed) and the SIPP provider/administrator always acts as a professional trustee and would always be guided by the death benefit nomination form that the client completes at outset. I regularly remind clients to review their nomination forms (for all pensions, SIPP or not).

At any time, the SIPP member can add an additional trustee(s) and this can be their spouse/partner or even their family solicitor. That person(s) can then act on their behalf.

As an IFA, I am obliged to take account of “mental capacity” when dealing with clients in the context of the Mental Capacity Act 2005 and, sadly, have on occasion had to make the difficult decision that a client was no longer fully in control of his or her faculties.

An interesting side-effect of the supposed long-term decline in annuity purchases and the increased take-up of drawdown either via a SIPP or insured pension scheme is the eventual lack of capacity that will strike many of us before we die. I have come to the conclusion that it is almost always the case that a client should set up a Lasting Power of Attorney when they set up a SIPP (for example) and choose, very carefully, appropriate individuals as their representatives should ill-health strike. I could never act as an attorney due to the obvious conflict of interest.

I do understand that less than 5% of “insured” personal pensions, etc. (i.e. those administered/managed by a life insurance company) are written into trust. This is a woeful fact, especially as all life offices freely offer appropriate trust documentation. All of the SIPPs I arrange (via an actuarial firm in Bristol) must be written into trust.

So, the combination of a trust deed and LPA should give effective protection for the pension plan holder in the event of physical or mental decline. I doubt, however, that most DIY investors with their on-line “execution only” SIPPs, have written their plans into trust or set up LPA’s.

Some silly people won’t write a will (don’t get me started!); I very much doubt that LPA’s and trusts will enter their heads accordingly.

Would just like to add, for balance, that I am a left-leaning wife who is the only person in the household interested in finance, and therefore all the investments are in my name. We’re still relatively early in accumulation but it’s true that I could keel over at any time, so I suppose I should take note and make sure Spouse knows where everything is (and why!) He would be perfectly capable of managing this stuff himself, but he really doesn’t want to, so let’s hope I don’t get hit by a bus.

Dear Monevator
Given your new comments policy, I hope this is the right place to post this given there hasn’t been any activity on this thread for nearly a year.
If I understand this article correctly, The Greybeard intends his wife (assuming she survives him) to keep her portfolio in income-focussed ITs indefinitely. But wouldn’t that portfolio still need to be monitored? Even if an IT has paid out a rising dividend for 50 years, isn’t it possible that it could still lose its way and have to cut or cancel its dividend? His wife would presumably then want to switch to a different IT. And given the likelihood of eventual cognitive decline mentioned in other comments, is this strategy sustainable indefinitely?
Regards
Steve the Lurker
P.S. Not sure if you want my real name or a handle in the “name” box, let me know if you want to know the former.

@Steve — Yes, I think that’s a fair question. The dividend could still be cut. At some point you do need a designated safe pair of hands around, whatever solution you adopt, except perhaps an inflation-linked annuity or some sort of full-service financial advisor (with the masses of expense and from my POV risk that latter would involve). Still, it would be a lot less likely to be a big issue than with a capital drawdown strategy where the partner is left to try to decide what to sell, when, how much, and whether it is still a good idea with, say, a market tanking.

I was reading the other day about proposals to create a sort of weaker form of power of attorney for children, for example, to help care for elderly parents as everyone’s affairs are becoming more complicated and dementia is a growing issue with longer lifespans. I am not an expert in this area at all, however, others will know far more than me. Unfortunately this post is rather old now, so I am not sure if they’ll be able to chime in, though some will have subscribed to the comments so should receive this one and may decide to add thoughts.

Regarding a portfolio of U.K. Equity Income Investment Trusts I ran a portfolio of originally 4 such trusts in 1990 which grew to 12 or so but the number reduced to just two at present, having moved to a different approach in the last few years.
My experience has shown that they have good and bad periods and on balance over 25+ years the cumulative average performance was good and dividend flows were pretty reliable. I suspect that little intervention would be required as the default action of corporate actions over the years would not have been a terrible choice!

Helping an elderly relative invest for retirement, setting up a portfolio almost 20 years ago and left untouched but monitored has demonstrated that doing nothing can work very well indeed.

@Investor
Thanks for the feedback. I’m 7 years older than my wife so I need to plan for going first, which is why I’m interested in Greybeard’s articles. I’m lucky enough to have an index-linked pension but that will only give my wife a survivor’s pension of 50% when I snuff it. The approach I’ve taken is to invest in the income units of index funds. At present, the income is being reinvested but a single phone call from her should be enough to switch to paying out. However, I’m not sure that the natural yield from our savings is going to be enough, particularly if she needs to go into care. I don’t fancy the IFA route. (My brother put my mother’s savings with a wealth manager when she went in to care and I was shocked to find out most of her money was in their own high-charging, poorly performing funds when she died.) However, it’s beginning to look more and more like the only option. I would be interested to know if anyone has had a more positive experience dealing with an IFA.
@Hariseldon
Thanks for responding. You say that the portfolio was left “untouched but monitored”. It’s the monitoring that will be the problem when I’m no longer here.